03/06/03

Today marks the first anniversary of the discovery of a rust hole in the lid of the Davis-Besse nuclear reactor, and owner FirstEnergy Corp. is still not certain when federal authorities will allow the plant to restart.

The Akron-based utility poured $298 million into repairs at the plant last year and has budgeted another $50 million so far this year. The cost of buying replacement power has added another $170 million to $205 million, making Davis-Besse a $500 million-plus headache, not to mention a public-relations nightmare.

Still, FirstEnergy's stock has outperformed the Dow Jones utility index and, currently priced below $30 a share, is considered a buy in the opinion of many analysts.

It's the bond-rating agencies that could become a thorn in the company's side, especially if the plant is not back on line by summer - when electric utilities make a lot of money - because they fear it could interfere with FirstEnergy's plans to pay down its debt.

Standard & Poor moved its outlook for the company to negative in April 2002 because it believed fixing the nuclear plant would take a long time. S&P's corporate rating for FirstEnergy is BBB, though certain bonds are BBB minus, the lowest investment grade.

"We understand the Nuclear Regulatory Commission can take its time," said Aneesh Prabhu, an associate director at S&P. "But if this outage becomes longer than April . . . particularly if it heads toward the summer months, and it affects their cash flow, we will have discussions. It could become a credit issue."

"Our position has been the same all along," Prabhu said. "I think the company understands from a credit point of view that the plant is important. They need the power."

Fitch also revised its rating outlook for FirstEnergy from stable to negative and currently gives a corporate rating of BBB. The agency is closely following the situation, said analysts Philip Smyth and Robert Hornick.

"The company is projecting the plant could be back on line in late March or April. We think that could slip a bit," said Smyth.

"There is wiggle room as long as it is not a major delay. If we come to June and it is not operating, we will have to make an assessment."

Company officials maintain they will have the 925-megawatt reactor ready to begin generating electricity sometime in April - but quickly add that the NRC has the final say.

"We have not seen any reason why the plant cannot come back into service, based on the work

we have done," said company spokesman Ralph DiNicola. "Our goal is to have the work done in April, but the NRC could determine there is more to do."

NRC officials have, in fact, indicated that April seems overly ambitious and said inspections will take at least through May. Jack Grobe, chairman of a special panel overseeing FirstEnergy's efforts, has repeatedly stressed the agency does not have a timetable.

Workers reloaded the reactor's fuel last week and plan to bolt down the new lid next week, said spokesman Todd Schneider. The reactor will not be restarted, however. Instead, crews will test the reactor building for air leaks near the end of the month, and then test the reactor itself for leaks in early April, he said.

The other potential problem for an April restart is the NRC's directive that the company must prove the "safety culture" at Davis-Besse has improved and that workers are encouraged to report potential safety problems. The company previously admitted that its plant managers emphasized production over safety and did not address safety concerns when they were brought up.

None of this is encouraging to bond analysts.

"A prompt Davis-Besse start-up is critical to maintaining the ratings, in our view," wrote Dot Matthews of independent research company CreditSights.

"We think there is a real possibility of downgrades to below investment grade if Davis-Besse continues to be delayed," Matthews advised her institutional clients. "Despite all of FirstEnergy's efforts to improve performance and cash flow, the near-term risk on this credit comes down to one nuke plant."

Matthews yesterday said CEO H. Peter Burg's statement in December that the company would not allow the plant "to become a black hole" and would consider "other options" if the NRC's restart approval began to drag on was troubling.

"That was the first time anybody associated with the company even hinted there might be a problem with starting it back up," she said. "That got my attention."

On the other side of the street, analysts of the company's stock are far more optimistic.

"Two years ago a sick nuke plant would have been a very strong negative, but relative to the other problems out there [among utilities], it's not being perceived as negatively as it would have been," said Paul Ridzon of McDonald Investments, who rates the stock a buy. Ridzon does not own the stock, but his firm does do investment banking with FirstEnergy.

"Not that Davis-Besse doesn't bother anybody," he said, "but investors can look past this because we know the problem isn't going to be there in two years."

The declines in FirstEnergy's stock price have pretty much followed the Dow Jones utility index, said James Halloran, energy analyst at National City's Private Investment Advisers.

"The group as a whole has been hammered," he said. "It was not specific to FirstEnergy."

Since March 11, 2002, the day before the company told the press about the rust hole, FirstEnergy's stock has fallen 23.8 percent, said Halloran.

"But if you owned utilities as a whole, you would be down 33.6 percent," he said, adding that during the same period the company out-performed the Dow Jones index of 500 top stocks by 4.7 percent.

National City, which owns 39,000 shares of the stock, has a hold on it. "We are waiting to see how this [Davis-Besse] finishes," Halloran said. "But we are not telling anybody to sell it.

"The point is that it has not been that bad an investment. Davis-Besse is not the whole company. It's a distraction, but it will become a more significant distraction if they get into summer and do not have a date when they can restart."

To reach this Plain Dealer reporter:

jfunk@plaind.com, 216-999-4138